I am in the midst of a major debate/discussion about the history and usage of GOLD — as a medium of exchange, a hedge against inflation, and as an investment.
What 3 things can you tell me about GOLD that most people do not realize?
~~~
Its a golden open thread — what say ye –about Gold?
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
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April 21st, 2009 at 9:48 pm
lead really can be transmuted into gold.
April 21st, 2009 at 9:48 pm
Gold has a multitude of practical uses (electronics, jewelry, other industries) … and looks really tacky as a tooth replacement.
April 21st, 2009 at 9:50 pm
Off the top of my head:
1) If you don’t count people living in nursing homes, most people probably don’t know what the gold standard was or that this country was once on it. I graduated with a bachelors degree and the subject never came up in a classroom in that 22-year period.
2) Gold was once widely used as money and could be used to pay debts.
3) Our government currently values gold at $42.2222 a troy ounce.
April 21st, 2009 at 9:50 pm
Here is one of my posts on gold:
http://willworkforjustice.blogspot.com/2008/12/gold-in-national-geographic.html
One excerpt:
“In all of history, only 161,000 tons of gold have been mined, barely enough to fill two Olympic-size swimming pools. “
April 21st, 2009 at 9:52 pm
1. All of gold above ground can be fit into a 2 story tall building; ie there is not that much of it around.
2. One can buy physical gold for cash and sell it for cash; ie if you gained a profit and didn’t report it in the tax return – you don’t pay tax.
3. CA is called a Golden State not because of the sun and golden hued tan but because the most gold extracted in the US came from CA.
April 21st, 2009 at 9:52 pm
Supply only grows a few percent per year. Very stable
Takes the power of the sun to destroy it
April 21st, 2009 at 9:54 pm
Readers of TBP are likely aware of it, but since most people in general probably are not all that familiar with the actual details of the Constitution of the United States (that quaint relic), it stands to reason that they are not familiar with Article I, Section 10:
Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
April 21st, 2009 at 10:00 pm
You don’t even need to move back to a gold exchange Barry. Just break the money multiplier and the system will calm right down. I wish the financial bloggery would do a major re-education push on the money multiplier until people get what it is. When they do they will swear off debt and give as little money to the banks as possible
April 21st, 2009 at 10:00 pm
@Will T: You always have to count people in nursing homes, they sure count on election day…”not dead yet”
This discussion ought to be good, don’t tell the folks at Mish’s about this discussion though, they are so gold lovin folks…
Off the top of my head, what most may not know about gold is the absurd spreads involved in buying and selling physical gold.
Also I hear there is a tax advantage to dealing in US Golden Eagles, in that the transaction is not IRS reportable, but if dealing in foreign coins that it is reported(and I suppose you would have to prove the basis for the transaction if questioned)
Another “I heard that” is that should gold be found in a safe deposit box after your death it is presumed guilty of tax evasion. Don’t know what happens to it though.
April 21st, 2009 at 10:08 pm
What 3 things can you tell me about GOLD that most people do not realize?
That the price is manipulated: http://www.gata.org/files/PIRATES-OF-THE-COMEX.pdf
You can swallow gold and your body will just pass it right on out your behind. (Think Goldschläger.)
That if you base your money on gold, you still haven’t solved the problem with someone being able to manipulate the value of your money without your control. And thus, they can manipulate how much your work is worth. And thus, they can make you into a slave. (Note, that this isn’t just a problem of money based on gold.)
April 21st, 2009 at 10:12 pm
An ounce of gold has consistently been equivalent to 350 loaves of bread over the last 2500 years (http://www.dailyreckoning.com/gold-in-the-art-of-bread-consumption). Talk about price stability!
Historically, kings would devalue their currencies by putting less gold or silver into it (but at least they couldn’t print their coins).
The US government holds gold in its reserve, yet it is a barbarous relic.
April 21st, 2009 at 10:21 pm
If you have freckles, gold jewelry looks better than silver.
If you buy gold coins in TX, there’s no sales tax, provided the transaction is over $1,000.
A Crown Royal bag with gold eagles and buffalos clanking around in it is a magical sound. I hear that Kruggerands sound even more magical.
April 21st, 2009 at 10:25 pm
Three things you might not know about gold.
1) It is not money. (It is a commodity.)
2) It has no inherent value. (Whatever value it holds is due to supply/demand.)
3) It is inelastic. (It makes a lousy currency choice if population is expanding.)
April 21st, 2009 at 10:26 pm
Everyone think gold is the best investment in an economic crisis. But the 3 things about GOLD that most people do not realize are:
1. Gold has very little intrinsic value to it – it’s basically just a really shiny, malleable metal
2. Gold is NOT edible! If you own gold- trade it for a farm land and some seeds. It is a life saver in every situation (deflation, inflation, stagflation, war, revolution)
3. Gold CAN’T protect you. If you own gold- trade it for guns. It will keep people or zombies from taking your property or killing you in every situation (deflation, inflation, stagflation, war, revolution).
TheCynicalEconomist.com
April 21st, 2009 at 10:41 pm
Most people don’t realize that the DJIA is down over 80% when priced in gold. In 1929-33, the DJIA decline was also over 80%. But then, the U.S. was still on the gold standard. Today, the U.S. uses toilet paper (fiat currency) for money – and we likely haven’t seen the bottom in the DJIA yet.
If you believe, as some do, that the price of gold/oz and the DJIA will cross before this depression runs its course, then we’re looking at a DJIA decline of 97% when priced in gold.
April 21st, 2009 at 10:42 pm
The Cynic brushed against this, but it’s worth repeating: in a true collapse, gold is worth nothing. Archeologists on digs throughout the Roman Empire have come across countless examples of nobles’ homes found replete with gold that hadn’t been touched for fifteen-hundred years; when the empire collapsed it was literally worthless.
I’m not saying it’s not a good inflation hedge under most circumstances, but in case of World War Z or some other such calamity, guns (preferably a rifle to shoot the zombie in the head), pikes, machetes, etc are the best currency in trade.
April 21st, 2009 at 10:44 pm
US Dollar is backed by a ~30% equity stake in all individuals and corporations in the US (this is known as “taxes”).
Gold is a shiny yellow rock.
Backing global economies on a shiny yellow rock that has minimal industrial value (unlike the US Dollar), would be disastrous today.
Our problem isn’t printing money (our current recession isn’t due to our deficit), but rather due to leverage. If all was changed was gold as a backing currency, then we would still have leverage on gold, same result. The only difference is you’d have a crapton of global resources put towards mining gold, not very efficient. Instead, we need a greater understanding of leverage and regulation around that. Gold as currency wouldn’t have solved the mess we are in now.
April 21st, 2009 at 10:48 pm
Also, gold is only valuable in a TEOTWAWKI situation, where global financial systems completely collapse and trade comes to a standstill.
In other words, gold only has a functional value when the sovereign states backing their currencies break down. So long as sovereign states maintain their power to tax (military and social power), gold does not play a functional role. A hedge with gold is a hedge against global collapse, it is not a hedge on inflation.
April 21st, 2009 at 10:51 pm
Nearly one billion cell phones are produced each year and most of them contain about fifty cents worth of gold. Their average lifetime is under two years and very few are currently recycled. Although the amount of gold is small in each device, their enormous numbers translate into a lot of unrecycled gold
http://geology.com/minerals/gold/uses-of-gold.shtml
April 21st, 2009 at 10:54 pm
All the gold in California is in a bank in the middle of Beverly Hills in somebody else’s name.
But stiff back or stiff knees, you’ll stand straight at Tiffany’s.
And it’s love that makes the world go ’round.
April 21st, 2009 at 10:55 pm
Here’s one for ya Barry: The inflation-adjusted return on gold for the last 210 years is .63%/annually.
But, that number belies the recent runup in the price of the metal; back in 2000, the 200 year inflation-adjusted return was only .07%.
I can get the sources if you care.
April 21st, 2009 at 10:56 pm
In April 1933, FDR ordered everyone to turn in their gold to the government at payment of $20.67 per ounce. He also imposed a penalty of $10,000 and/or 10 years imprisonment for those who failed to comply.
April 21st, 2009 at 10:59 pm
Barry, did you see the latest Clarium Capital letter? It’s all about the gold standard and Bernanke’s current predicament. Great read. It’s on my site down the page a bit if you’re interested. I haven’t been able to post links to your site though. Not sure why….Click on my name I guess. It’s great stuff.
April 21st, 2009 at 10:59 pm
Interesting that most of the responses are anti-gold.
IMO factual: Along w the USD, only gold is acceptable virtually anywhere in the world as a store of value. It will get you past a border guard, get a friend out of a third world jail, etc. The renminbi won’t. Diamonds need verification. No matter its flaws, unlike paper and digital money, its quantity can only grow more or less as fast as population, so it is immune from government money supply expansion. So the arguments against it posted above are largely true but miss the point. The point is that gold has been either money or, since 1971, quasi-money in much of the world for thousands of years. How long will the dollar last?
April 21st, 2009 at 11:00 pm
Gold/oil ratio at a 10 year high:
http://seekingalpha.com/article/120130-gold-s-net-longs-and-gold-oil-ratio
(Maybe USO will do better than GLD over the next two years).
April 21st, 2009 at 11:03 pm
The people of Zimbabwe are crazy, at least according to The Cynic and Cyno.
“GOLD FOR BREAD ZIMBABWE”
http://www.youtube.com/watch?v=B-iCuAM7OqA
HT:Kevin Depew
So are Californians (but we all knew that already)
“New gold rush hits California”
http://www.usatoday.com/news/offbeat/2009-04-02-goldpanning_N.htm
April 21st, 2009 at 11:04 pm
Gold is not a good currency? I suppose green pieces of paper that represent wortlhess debt is a good currency. Gold is actually a great currency…doesn’t tarnish or decay…can be sub-divided…is rare…is dense (doesn’t take a lot of space) and its expansion is controlled (not a printing press). Most of all, gold is a good currency, as it has been valued thoughout all of human history.
That being said, I do not think in a massive deflation, gold will soar…it will hold its value better than most things though. The time to buy gold, especially miners, is when the deflation ends…you have plenty of time to wait.
April 21st, 2009 at 11:06 pm
I just tried to log out, and got the following:
“You are attempting to log out of The Big Picture
Please try again.”
It won’t let me log out. This is like the Mafia… once you’re in, you can’t get out.
April 21st, 2009 at 11:07 pm
Gold is a terrible currency; in case of apocalypse, I don’t think we’ll be needing it for high end electronics or space ship parts.
We’ve had salt standards in the past. At least that makes sense since salt has many every-day uses and a value beyond being shiny.
April 21st, 2009 at 11:10 pm
For the private retail investor, there is an emergent psychological quality that becomes manifest: Once you hold minted bullion gold coins in your hand for the first time, the sense of security compels you to increasingly acquire more gold to accentuate the felt relief. Hence, hoarding gold (and other precious metals) becomes an acquired behavioral trait.
April 21st, 2009 at 11:10 pm
Gold can only be mined with actual work and productivity, not printing presses or trader’s desks.
Gold is inelastic. Even if the population is growing, everone pays their dues. You don’t receive hunted meat or cropped wheat because you’re alive, you’re alive to hunt meat and crop wheat.
A woman who knows her family tree will always own one piece of gold jewelry.
April 21st, 2009 at 11:12 pm
Gold has had great ability to alter the behavior of individuals and nations for centuries ( see Peter Bernstein’s book THE POWER OF GOLD). Gold was a significant precipitating factor in the Civil War. The discovery of gold at Sutter’s Mill caused a massive “get rich”migration to California. The lawlessness that ensued prompted the need to organize territorial governments to try to control the situation (or enrich the politicians and merchants if you are a cynic). This ultimately led to the Compromise of 1850 and the Fugative Slave Act. The Fugative Slave Act was particularily effective in polarizing the pre-existing sectional disputes that eventually led to the failure of the Whig party and formation of the Republican party. As they say, “The rest is history”.
April 21st, 2009 at 11:16 pm
If I was climbing into a time machine and only had a small physical space to include what I would use to for currency conversion at my destination, forward or backward in time, I would take gold. As a currency gold has superior timelessness.
April 21st, 2009 at 11:18 pm
“Three things you might not know about gold.
1) It is not money. (It is a commodity.)
2) It has no inherent value. (Whatever value it holds is due to supply/demand.)
3) It is inelastic. (It makes a lousy currency choice if population is expanding.)”
1) Perhaps you do not regard it as money, but it was a bold statement to say that gold is (definitively) not money.
2) Its value lies in the fact that its supply cannot be easily manipulated.
3) Perhaps money should not be inelastic (see #2). Furthermore, perhaps populations should not be ever-expanding….
April 21st, 2009 at 11:20 pm
If you want to understand gold and its origin as money from the Austrian perspective (i.e., the only non-crankish economic perspective), you should listen to Professor Hoppe’s talk on the origin and nature of money. You’ll thank me once you listen to it:
http://mises.org/MultiMedia/mp3/NWO/05_NWO_Hoppe.mp3
April 21st, 2009 at 11:21 pm
When I was working in Alberta, I had the chance to buy Canadian 1 oz. Maple Leaf coins. It was a lark, and I bought 10 @ 275 an oz. I had never held gold before, and I was always taking them out and playing with them – I could not explain why, as it had nothing to do with the monetary value, as at that price it was only worth like 3k.
Back in the 90′s, you could not take more than a few grand in cash over the border without getting a hairy eyeball from the customs jerks. But they didnt give a crap about gold coins. That was then. There is something about gold that alters your mood when you handle it. I noticed that when I had a headache, that when I held the coins on my temples, I felt better.
Not kidding.
April 21st, 2009 at 11:21 pm
1. Gold IS money. That is why, like the fiat dollar, its value increases relative to goods and services during times of deflation.
2. Inflation alone is not necessarily a positive for gold investment. The determining factor is the real interest rate (i-rate minus inflation).
3. It is not the value of gold that changes, it is the value of the fiat currency that gold is “valued” in that changes.
April 21st, 2009 at 11:22 pm
gold can’t be destroyed and it is rare. The very gold that was on Cleopatra’s neck is most likely on somebody’s ring finger today. Indestructibility and rarity are two factors that make it very hard to manipulate it’s value. That is unlike paper currency which has lost over 95% of it value over the last 70 years or so and most of it since it went off the gold standard in 1970
April 21st, 2009 at 11:23 pm
From a long term perspective gold can be seen to hold its value (within a range) when compared to the value of a loaf of bread, a dozen eggs, or a suit of clothes. Of course there is a range it deviates in over certain financial cycles but, it is relatively even…..and despite the fact that most people never keep track of such price patterns. Famine, war, and supply gluts (gold rushes) aside. …
April 21st, 2009 at 11:29 pm
Contrary to popular opinion, gold is actually a better performer in deflation than inflation. Fred Sheehan detailed this in a data-rich analysis in 2005 in one of Marc Faber’s issues of GBD. Recent events are so far consistent with Fred Sheehan’s original report. I’m not sure if this article is available anywhere else.
April 21st, 2009 at 11:29 pm
The Interest said “You can swallow gold and your body will just pass it right on out your behind. (Think Goldschläger.)”
Boy, passing a Krugerrand has gotta hurt!
Anyway:
- Pyrite (aka “fools gold”) has been mistaken for the real thing sometimes.
- An ounce of gold is based on troy weight–20 pennyweights or 480 grains. A pound of gold is 12 ounces, while most other non-precious metals are based on the standard avoirdupois scale of 16 ounces to the pound, and approximately 32 grams to the ounce.
- Gold is used in window glass and astronaut helmets to reflect infrared rays while allowing sunlight to pass through, and at the same time keeping it cool.
- Gold is inactive chemically and is not affected by air, heat, moisture and ordinary solvents.
Last 3 entries from:
http://www.goldgold.com/goldfacts.htm
April 21st, 2009 at 11:30 pm
@ Byno – true, but gold won’t dissolve if you drop it in water.
Re: Roman Empire collapse – very true about lots of hoarded gold being found in Roman villas all over the Empire. Why? Because trade, hence manufacturing, almost stopped as the empire declined. If there is nothing to buy, what good is gold?
OTOH, it’s great in the interim periods before any empires begin their collapse. It is a good inflation hedge, pretty worthless in deflation, depending upon when the holder bought the metal. In any event, most retailers wouldn’t accept gold as payment for goods, preferring green-inked paper, in the last runup of prices when the metal was re-legalized in the 1970s. As prices soared a coin dealer friend of mine walked across Main Street to the local TV shop where televisions were selling for about $800. The coil dealer offered a one-ounce gold coin. The TV salesman would not accept, even though the dealer could sell the coin for $800 in USD. Interesting, eh?
April 21st, 2009 at 11:30 pm
“What 3 things can you tell me about GOLD that most people do not realize?”
1. Gold is money. Gold and the Sr. FIAT currency rise together in a post bubble credit contraction, once the initial liquidation phase has passed. It has and note since early 2009, they’ve pretty much risen and fallen together.
2. Gold as competition to FIAT currencies is often managed by CBs to control its price. Latest example issued by Forbes tonight.
FRANKFURT, Germany — The European Central Bank said on Tuesday it used proceeds from gold sales to boost its U.S. dollar reserves in 2008, although dollar holdings fell as a proportion of overall currency reserves.
The overall increase in reserves was funded by the sales of 30 tonnes of gold, which were announced in 2008. “The proceeds of the gold sales were added to the U.S. dollar portfolio,” it said in its annual report.
http://www.forbes.com/feeds/afx/2009/04/21/afx6318098.html
3. 40 years ago, 1 oz of gold bought a very nice suit, today it still buys a very nice suit. The cash equivalent, well perhaps a tie. 100 ozs would’ve bought a really nice car. Today 100 ozs still buys a very nice car. The cash equivalent, well, perhaps that would pay for one repair bill. 1000 ozs would’ve bought a large house. Today, 1000 ozs still buys a very large house. The cash equivalent, perhaps a small car for the garage.
Alot of people often compare the old 1980 intraday high to today’s dollar in inflation adjusted terms. Faulty logic. To start with inflation stats are themselves manipulated and bent out of sort to make such analysis very, very subjective. Also, it spent perhaps 7 days above $700 in 1980. Those that wish to conveniently pick the precise 2 minute top for a 30 year comparison was deliberately disingenuous. Use the annual average or monthly average instead, but then it depends upon which FIAT currency you’re comparing to. The most intuitive way is starting with the date of the Fed’s inception, if you placed 10 ozs of gold and the cash equivalent along with it in a box in the ground and did the same thing thereafter every 10 years through to present day, which would you rather have now. The dollar has lost over 90% of its value since the Fed’s inception. For me, Gold is money, not the investment and when financial assets, i.e. stuff is more valuable, money declines, hence the value in that currency of gold declines. In a credit contraction, gold rises in value, especially the REAL price as compared to other assets such as commodities. You can equate the REAL price to the profitability of the miners, hence when I’m accumulating jr gold companies with great assets as their intrinsic value is sharply on the rise.
April 21st, 2009 at 11:31 pm
Oh, my, bait for the sun goddess, okay, 3 things quickly and briefly that “americans” and Barry Ritholtz need to know about gold:
1. westerners do not get gold; the rest of the world does and you are out numbered.
2. gold doesn’t chart well.. (ask Andy)
3. gold is money/currency immemorial and into the future.
April 21st, 2009 at 11:36 pm
SB: That being said, I do not think in a massive deflation, gold will soar…it will hold its value better than most things though. The time to buy gold, especially miners, is when the deflation ends…you have plenty of time to wait.
Doesn’t the first part of this paragraphy contradict the second? If, time to buy goal, miner, is when the deflation ends, and there is time for deflation to end, and if in deflation gold loses less than any other, then isn’t it buy to gold/miners now?
I agree with most of your statements, except that I believe the time is now. I think real estate will continue going down, banks won’t pay me enough interest, stocks will go down, so what else is there but gold for the time being?
My money is on a gold miner who isn’t even producing yet, and enjoying strong dollar.
April 21st, 2009 at 11:37 pm
Things I find most fascinating:
1) If we melted down everything (including King Tut’s death mask) there still would not be one ounce of gold for every person in the world.
2) Durable beyond imagination….Know what 500 years at the bottom of the ocean does to gold? Absolutely nothing. So, a ship sank 500 years ago with gold and paper money…the gold’s still there, the paper’s gone (as is the government that issued it).
3) The US mint is required by law to make gold coins “in quantities sufficient to meet public demand” available to the public at market price. The will not sell to the public, they use dealers and the public is currently paying about 10% over market price (and BTW, looks like kitco is out of one ounce eagles again).
4) Can be worked to be only 3 atoms thick (one ounce = 300 s.f.).
5) Gold is more dense than lead.
6)Approximately 16 times more rare than silver.
7)Capital Gains taxed as a “collectible” by the US government.
8)Although Silver is a better conductor, gold is far more corrosion resistant.
Ooops, forgot about the “three things” limit….sorry.
April 21st, 2009 at 11:37 pm
All natural gold atoms originally were forged in the centers of stars which later exploded as supernovae, dispersing the atoms throughout the universe. Billions of years ago, the gold in the ring around your finger right now was trapped in the center of a star, ten million degrees hot, waiting for the explosion to send it flying through interstellar space.
Most gold atoms on earth did not come directly from their birth stars, but were captured by other star formations and then re-released again in new supernovae, like bus stops along the way.
In 1977 the Voyager spacecraft was launched with a gold-plated disc with information about humanity, and, who knows, this might be the only Earth gold which will escape the death of our own sun in about 4.5 billion years since Voyager is already outside the orbit of Pluto and still going.
http://imagine.gsfc.nasa.gov/docs/teachers/lessons/xray_spectra/background-elements.html
http://en.wikipedia.org/wiki/Voyager_Golden_Record
April 21st, 2009 at 11:37 pm
I try to not to harbor any biases because it screws up trading….
But, I hate gold.
All the gold that has ever been produced remains in existence today. It’s a mediocre long term investment. In the event of a calamity, gold will do you no good. Think Mad Max beyond Thunderdome type stuff. What would you rather have in the event of the real apocalypse? Guns, ammo, livestock, gasoline? or Gold?
It only has value because we believe it has value….very similar to some fiat currencies I use everyday…..
April 21st, 2009 at 11:38 pm
A modern gold-based monetary system would probably function a lot like “GoldMoney”. This service is similar to PayPal except that payments are made in physical amounts of gold — i.e. “gold grams”.
A gold-based monetary system would be free from political influence. With today’s fiat-based central bank system, the Federal Reserve could cut the value of the U.S. Dollar in half simply by a decision of a handful of people. This is a needless risk; and it is one that I am increasingly unwilling to endure.
April 21st, 2009 at 11:39 pm
One other. …. The literal translation in Chinese for money is “gold coins”. The meaning of this is not unimportant.
http://www.orientaloutpost.com/c/kp4/37666.gif
http://www.orientaloutpost.com/money.php un
April 21st, 2009 at 11:40 pm
Gold has value. It can be used as a catalyst for many chemical reactions; it is an excellent conductor (we only use copper because its cheaper, good electronics are gold plated.) It is often found adjacent to copper and silver deposits because the same geological processes that concentrate the ore affect the three metals in the same way (they are in the same periodic table group.) Gold is edible but not nutritious. Gold leaf can be used as decoration for food. Most of the gold ever mined is sitting in central bank vaults.
April 21st, 2009 at 11:41 pm
“What 3 things can you tell me about GOLD that most people do not realize?”
1. Gold is money. Gold and the Sr. FIAT currency rise together in a post bubble credit contraction, once the initial liquidation phase has passed. It has and note since early 2009, they’ve pretty much risen and fallen together.
2. Gold as competition to FIAT currencies is often managed by CBs to control its price. Latest example issued by Forbes tonight.
FRANKFURT, Germany — The European Central Bank said on Tuesday it used proceeds from gold sales to boost its U.S. dollar reserves in 2008, although dollar holdings fell as a proportion of overall currency reserves.
The overall increase in reserves was funded by the sales of 30 tonnes of gold, which were announced in 2008. “The proceeds of the gold sales were added to the U.S. dollar portfolio,” it said in its annual report.
http://www.forbes.com/feeds/afx/2009/04/21/afx6318098.html
3. 40 years ago, 1 oz of gold bought a very nice suit, today it still buys a very nice suit. The cash equivalent, well perhaps a tie. 100 ozs would’ve bought a really nice car. Today 100 ozs still buys a very nice car. The cash equivalent, well, perhaps that would pay for one repair bill. 1000 ozs would’ve bought a large house. Today, 1000 ozs still buys a very large house. The cash equivalent, perhaps a small car for the garage.
Alot of people often compare the old 1980 intraday high to today’s dollar in inflation adjusted terms. Faulty logic. To start with inflation stats are themselves manipulated and bent out of sort to make such analysis very, very subjective. Also, it spent perhaps 7 days above $700 in 1980. Those that wish to conveniently pick the precise 2 minute top for a 30 year comparison was deliberately disingenuous. Use the annual average or monthly average instead, but then it depends upon which FIAT currency you’re comparing to. The most intuitive way is starting with the date of the Fed’s inception, if you placed 10 ozs of gold and the cash equivalent along with it in a box in the ground and did the same thing thereafter every 10 years through to present day, which would you rather have now. The dollar has lost over 90% of its value since the Fed’s inception. For me, Gold is money, not the investment and when financial assets, i.e. stuff is more valuable, money declines, hence the value in that currency of gold declines. In a credit contraction, gold rises in value, especially the REAL price as compared to other assets such as commodities. You can equate the REAL price to the profitability of the miners, hence when I’m accumulating jr gold companies with great assets as their intrinsic value is sharply on the rise.
April 21st, 2009 at 11:44 pm
Word press keeps eating my post, so not sure how many times this will show up. Apologies if this is duplicated.
What 3 things can you tell me about GOLD that most people do not realize?”
1. Gold is money. Gold and the Sr. FIAT currency rise together in a post bubble credit contraction, once the initial liquidation phase has passed. It has and note since early 2009, they’ve pretty much risen and fallen together.
2. Gold as competition to FIAT currencies is often managed by CBs to control its price. Latest example issued by Forbes tonight.
FRANKFURT, Germany — The European Central Bank said on Tuesday it used proceeds from gold sales to boost its U.S. dollar reserves in 2008, although dollar holdings fell as a proportion of overall currency reserves.
The overall increase in reserves was funded by the sales of 30 tonnes of gold, which were announced in 2008. “The proceeds of the gold sales were added to the U.S. dollar portfolio,” it said in its annual report.
http://www.forbes.com/feeds/afx/2009/04/21/afx6318098.html
3. 40 years ago, 1 oz of gold bought a very nice suit, today it still buys a very nice suit. The cash equivalent, well perhaps a tie. 100 ozs would’ve bought a really nice car. Today 100 ozs still buys a very nice car. The cash equivalent, well, perhaps that would pay for one repair bill. 1000 ozs would’ve bought a large house. Today, 1000 ozs still buys a very large house. The cash equivalent, perhaps a small car for the garage.
Alot of people often compare the old 1980 intraday high to today’s dollar in inflation adjusted terms. Faulty logic. To start with inflation stats are themselves manipulated and bent out of sort to make such analysis very, very subjective. Also, it spent perhaps 7 days above $700 in 1980. Those that wish to conveniently pick the precise 2 minute top for a 30 year comparison was deliberately disingenuous. Use the annual average or monthly average instead, but then it depends upon which FIAT currency you’re comparing to. The most intuitive way is starting with the date of the Fed’s inception, if you placed 10 ozs of gold and the cash equivalent along with it in a box in the ground and did the same thing thereafter every 10 years through to present day, which would you rather have now. The dollar has lost over 90% of its value since the Fed’s inception. For me, Gold is money, not the investment and when financial assets, i.e. stuff is more valuable, money declines, hence the value in that currency of gold declines. In a credit contraction, gold rises in value, especially the REAL price as compared to other assets such as commodities. You can equate the REAL price to the profitability of the miners, hence when I’m accumulating jr gold companies with great assets as their intrinsic value is sharply on the rise.
One other. …. The literal translation in Chinese for money is “gold coins”. The meaning of this is not unimportant.
April 21st, 2009 at 11:45 pm
@ DL 10:56
“In April 1933, FDR ordered everyone to turn in their gold to the government at payment of $20.67 per ounce. He also imposed a penalty of $10,000 and/or 10 years imprisonment for those who failed to comply.”
In January of 1934 FDR declared that the dollar was only worth 13.71 grains of gold, not the 23.22 grains it was worth when the gold was confiscated. With the gold and silver ETFs these days it seems like it would be easier than ever to confiscate gold and silver.
April 21st, 2009 at 11:45 pm
(1) the tax rate on gold held over a year is 28%(treated as a collectible by the IRS) as opposed to the 15% long term cap gains rate for stocks.
(2) Gold hit a number of all time(going back to 1919) highs relative to other commodities recently…namely vs copper(back in Nov and then again in Feb), and vs corn(back in Feb). The massive rally in copper has brought the ratio back into a more normalish range, but gold remains extremely expensive relative to corn(and the ags) on a historical basis. The fact that this data series includes the Great Depression goes to show how big the relative mania had become.
April 21st, 2009 at 11:50 pm
4. Most people know jack shit about gold.
April 22nd, 2009 at 12:00 am
follow on to my previous comments:
Clearly there are better hedges against inflation than gold…just look at it’s current valuation relative to all the other commodities you can buy. Gold’s value shines on those rare times when the entire banking system is on the verge of collapse…like now. You can say that gold is a better *deflation* hedge than the other commodities but I think that that is due to the banking stress associated with deflationary times in addition to it’s limited supply relative to other commodities. Gold’s primary value comes from the fact that (a) it doesn’t have an industrial use but is a valued jewelry metal, (b) very limited supply, (c) you can carry your entire net worth in a single brick of gold. It’s unique. Diamonds are similar, but less homogenous.
April 22nd, 2009 at 12:09 am
Buffett is quoted along the lines “gold is dug out of a hole, then put in another hole (vault) and guarded by armed man; martians watching from outer space would scratch their head”. Did he not own a lot of Silver (granted Silver is not Gold but in the context of the fiat currency discussion I look at them as similar) until a few years ago?
April 22nd, 2009 at 12:21 am
1) Huge imports of American gold and silver by the Spanish in the 16th century was actually inflationary.
2) If you spray-paint someone from head to toe with gold paint they will die.
3) Although gold is not easily destroyed, it could be irradiated in quantity by a mad scientist with a nuclear device.
April 22nd, 2009 at 12:30 am
1. Nevada is the single largest gold-producing state in the US. The majority of all gold coming out of Nevada comes from the “Carlin-Eureka Trend,” which is an area about 100 +/- miles long, about 30 miles wide, running roughly from north of Carlin (on I-80) to just south of Eureka on US-50.
2. All these mines are open-pit, heap-leach mines. The gold is not visible to the naked eye at all – it is mineralized in the soil at rates from 0.1 oz/ton of earth to 2+ oz/ton (aka “high grade ore”). I could describe the mining process in detail if people would like, as I was on the environmental/community advisory committee for a mine in Eureka County and am quite familiar with the process.
3. The costs of extraction and refining for these mines runs anywhere from approximately $120/oz refined gold up to about $250 to $300/oz. The factors affecting the cost per ounce (troy ounce, BTW) are the concentration of the ore body, whether or not it is “refractory ore” and requires additional processing in an oven before refining and the input costs, such as diesel, tires, equipment, salaries, etc.
One last thing that most people don’t know about gold mines (and coal mines): the speed and costs of extraction rest on such details as: can the mine operator get enough radial tires for the fleet of haul trucks? No radial tires means going back to bias-ply tires, which heat up faster and require the operators to slow down the total # of trips a truck can make in a day. Radial tires don’t heat as much, and can make more trips per day. Such little factors like that can make or break the financial viability of a mine when gold prices are low.
April 22nd, 2009 at 12:40 am
Gold makes people buy guns.
April 22nd, 2009 at 12:46 am
1. 24K gold usually does not set off airport metal detectors.
2. Gold salts/injections are one of the oldest known treatments for Rheumatoid arthritis.
3. Despite platinum being 30X rarer and a stronger metal than gold, the platinum:gold price ratio over the last thirty years has varied between 0.8 and 2.2. The only reason for gold to be worth more than platinum is irrational buying by the gold bugs.
April 22nd, 2009 at 12:54 am
Gold does not dissolve in single acids but a mixture of Hydrochloric Acid and Nitric Acid called Aqua Regia will dissolve Gold. Aqua Regiad has been used to smuggle Gold in dislived liquid form.
For centuries the Chinese accepted only Gold as payment for their goods until the British discovered many Chinese had a weakness for Opium. The port of entry for the opium was Hong Kong. The Chinese Emperor became alarmed at the country’s dwindling Gold reserves as the result of widespread addiction and the result was the Opium Wars in which the dope dealing Brits prevailed.
In 1970 Harry Browne in his book “How You Can Profit From The Coming Devaluation” made one of the great calls in US financial history predicting that Nixon would have to take the US off the Gold Standard and that Gold would dramatically increase from the statutory price of $35 per ounce. In 1971 Nixon did take the US of the Gold Standard and kicked off the inflationary 1970′s with wage and price controls making matters only worse. People that stocked up on Gold Coins on Browne’s 1970 recommendation had a nice return.
April 22nd, 2009 at 1:09 am
Some observations that might weigh in:
1. Gold no longers trades as an alternative currency. It trades like all of the other commodities. This may be due to the fact that 1971 is nearly two generations ago and the traders today have nearly forgotten about the gold-backed currency days, at least when they trade. (To wit, US treasuries have apparently taken over gold’s traditional roles as the capital preservation investment of last resort).
2. Despite claims to the contrary, gold backed currency does not limit economic expansion. It does eliminate inflation above the amount of new gold mined per year however (in terms of gold). We have succumbed to the notion that inflation must exist for a healthy economy. This is a myth tied to debt-based money creation and the Federal Reserve system. In a gold backed system inflation is reduced to near zero, though expansion occurs as it does in any economic system. The inflation myth is often used by monetarists as the reason that the current system is superior and must perpetuate.
3. The US currently has the largest gold reserves of any individual country with 8,133.5 tons (assuming that Fort Knox still holds what it should). The EU countries aggregated do have a bit more with 11,065 tons. China, with just 600 tons, is a relative pipsqueek and this may explain rumors that they are buying gold on the sly.
http://interesting-facts.fun-with-english.co.uk/2008/06/interesting-fact-817-gold.html
April 22nd, 2009 at 1:15 am
1) Gold’s attraction is almost entirely psychological, thus by nature it has the highest intrinsic value. Why else would something with practically no logical, practical use be worth even ~$240/oz at it’s most recent low? In this regard, all rational arguments against gold actually reinforce the case for gold because it’s attraction is entirely, innately, irrationally human.
2) Gold isn’t a typical commodity because most of it is never consumed. What other commodity, etc. could possibly survive an ever-growing supply with no logical, practical demand usage and still maintain such high relative value?
3) Gold, as the ultimate safe haven — universally recognized independent of borders & peoples, compact, portable, malleable, divisible, etc. — moves inversely with political and economic stability. Excessive inflation and/or deflation are indicators of instability, which is why gold does exceedingly well (relatively) in both circumstances but is often mis-read simply as an inflation hedge.
And, for the bonus…
4) Governments worldwide tell their people that gold & guns are of no concern to citizens, and yet they are the biggest possessors of both. The “Golden Rule” — he who has the gold (and guns) makes the rules.
April 22nd, 2009 at 1:19 am
Gold is a form of money. In a truly free market economy, it would probably serve as money or back currencies.
Gold is not an investment.
Gold is honest. Using it honestly would keep bankers and governments from destroying economies.
April 22nd, 2009 at 1:24 am
A group led by former FED governor Wayne Angell made a trip to Russia in Sept. 1989 to recommend a GOLD PEG FOR THE RUBLE. At the time the Soviets had $26 billion of gold bullion more than enough to purchase ever ruble in existence at 4 rubles to the dollar. His group suggested the ruble be pegged to gold somewhere between one and three rubles to $1US.
Since Russians had NO DEBTS, but only savings in state banks there would be little deflationary pain associated with the move. Instead the russian citizens would receive a very large windfall in effect a TRANSFER of WEALTH from state hands to private hands which of course was the whole point of the transition from communism to a market economy. Citizens has 350 billion rubles accumulated through hard work which would become worthless under hyperinflation. With a gold peg in place, the demand for rubbles would skyrocket and the supply of rubles would not have to be contracted very much if at all. The soviet govt. could then issue long term debt to its own citizens at 5-6% annually the same rates a fledgling US govt. issued debts in the early 19th century rather than using the printing press to print more money. In 1989, the market rate on a one year GOLD LOAN was about 2%. The presence of ruble denominated debt would create a POLITICAL INTEREST GROUP committed to a stable currency to offfset the dollar based exporters who favored devaluation. It was a proposal of towering ambition and cutting edge sophisitcation – simply bewildering to do in 1989. Many soviet politicians listened with great interest as it was obvious the economy ws on the brink of hyperinflationary collapse. The soviet economists were BAFFLED that these Westerners and a governor of the FED no less would advocate something they had NEVER read in western textbooks. In the end, the soviets took the advice of the IMF and the Havard Institute of International Development, perferring the certainty of economic disaster to the unknowns of the gold standard. The idea of a bond payable in gold was too uncomfortable at the time but as confidence in the ruble imploded the govt. in 1990 just seven months later the govt was issuing bonds payable in cars, tv’s and refrigerators.
From Gold the Once and Future Money – who knew Wayne Angell was a hard money guy. I guarantee just as Sir Alan was a hard money guy, Wayne has been corrupted by politics and washington and the fiat banking system.
April 22nd, 2009 at 1:25 am
Pet peeve
@mark mchugh Says: April 21st, 2009 at 11:37 pm
6)Approximately 16 times more rare than silver.
1 times more rare would mean it didn’t exist. Beyond that I think we’re talking alternate universes. ;)
April 22nd, 2009 at 1:29 am
A group led by former FED governor Wayne Angell made a trip to Russia in Sept. 1989 to recommend a GOLD PEG FOR THE RUBLE. At the time the Soviets had $26 billion of gold bullion more than enough to purchase ever ruble in existence at 4 rubles to the dollar. His group suggested the ruble be pegged to gold somewhere between one and three rubles to $1US.
Since Russians had NO DEBTS, but only savings in state banks there would be little deflationary pain associated with the move. Instead the russian citizens would receive a very large windfall in effect a TRANSFER of WEALTH from state hands to private hands which of course was the whole point of the transition from communism to a market economy. Citizens has 350 billion rubles accumulated through hard work which would become worthless under hyperinflation. With a gold peg in place, the demand for rubbles would skyrocket and the supply of rubles would not have to be contracted very much if at all. The soviet govt. could then issue long term debt to its own citizens at 5-6% annually the same rates a fledgling US govt. issued debts in the early 19th century rather than using the printing press to print more money. In 1989, the market rate on a one year GOLD LOAN was about 2%. The presence of ruble denominated debt would create a POLITICAL INTEREST GROUP committed to a stable currency to offfset the dollar based exporters who favored devaluation. It was a proposal of towering ambition and cutting edge sophisitcation – simply bewildering to do in 1989. Many soviet politicians listened with great interest as it was obvious the economy ws on the brink of hyperinflationary collapse. The soviet economists were BAFFLED that these Westerners and a governor of the FED no less would advocate something they had NEVER read in western textbooks. In the end, the soviets took the advice of the IMF and the Havard Institute of International Development, perferring the certainty of economic disaster to the unknowns of the gold standard. The idea of a bond payable in gold was too uncomfortable at the time but as confidence in the ruble imploded the govt. in 1990 just seven months later the govt was issuing bonds payable in cars, tv’s and refrigerators.
April 22nd, 2009 at 2:13 am
1. I have gold in my mouth.
2. There’s lots of gold in seawater…stake your claim in the ocean.
3. Gold spelled backwards is dlog.
April 22nd, 2009 at 2:26 am
Gold is a figment of our imagination.
April 22nd, 2009 at 3:15 am
@Stuart
The Chinese word for cash is “Now Gold”
Finance is “Gold Melt”
April 22nd, 2009 at 5:10 am
well, no one else, seemingly, mentioned it..
Gold is no one else’s Liability.
past that, the whole “Gold has no function” series of responses is ample Evidence that Brainwashing is alive and well..one can, safely, add to that category: “Gold is inelastic”.
Currency ‘elasticity’ only benefits those that seek to steal–spend what they do not have/cannot take by Force/Taxation..
April 22nd, 2009 at 6:03 am
George Harrison, while digging up stones to build a house, discovered gold in South Africa – since then, the source of nearly 40% of all gold ever mined. I presume this is not the ex-Beatle.
April 22nd, 2009 at 6:05 am
It can not be produced out of thin air like currency.
It’s an extremely stable metal that lasts forever.
It’s magic to hold.
April 22nd, 2009 at 6:14 am
@Mich…I’ll re-phrase it…the time to buy gold to protect value is now…the time to buy gold as a speculative investment is after the deflation.
April 22nd, 2009 at 6:27 am
re: Gold and its effect on ‘the body’
it trends towards this phenomenon:
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=bio+magnetism
April 22nd, 2009 at 6:34 am
Here’s one for you, Barry: The extent to which a 1957 novel by a Russian immigrant influences ostensibly serious discussions about gold is greatly underestimated. And of course, Rand’s understanding of human psychology is a lot like S&P’s understanding of MBS credit risk was a few years ago — why bother with reality when your model neatly accounts for everything?
April 22nd, 2009 at 7:21 am
3 things:
1) A fair number of people are really weird when it comes to gold. They love it no matter what is going on in the market…strange. This makes it really difficult for people who don’t give a damn to determine if gold is actually worth anything.
2) If we do have a massive collapse don’t show up at my parent’s farm and try to buy food with gold…you won’t get any.
3) Based on a previous comment, it appears gold is yet another reason to bash Americans.
April 22nd, 2009 at 7:42 am
Gold was cash for a while and is NOT an investment except as a counterweight if you are under a fiat currency regime. Gold (and silver) go through inflationary and deflationary cycles – at the time of the California rush, the gold prices of ordinary things went up – some from demand, but the money supply went up too! Compare with the movement to pay in silver after the Comstock lode caused silver to depreciate.
Gold can not be dissolved in anything but aqua-regia (which is a combination of hydrochloric and nitric acids). It does not corrode.
Gold and tungsten have the same density, so coating a tungsten slug is a way to counterfeit gold coins.
Gold is dense. A few coins are very heavy.
It is easy to refine gold – melting it with dross separates the gold from any other junk.
Gold is the most malleable metal. Gold leaf is only about 100 atoms thick. (the second most malleable metal is palladium which is probably more interesting than gold).
It is yellow because it reflects infrared through yellow more than blue through ultraviolet.
April 22nd, 2009 at 7:49 am
Price spikes in Gold are easier to fade than other commodities such as Crude.
Thus, when trading gold becomes fashionable, and the novice traders swarm into the market, two things happen.
1. There are more price spikes to trade/fade because the increased interest.
2. Fading price spikes become easier because much of the action that created the spike was initiated by the uninitiated.
Thus, it is self-reinforcing.
My guess is that it would be an easy time to implement an automated gold futures systems that shorted every upward price spike….hey, now that I think of it!
Ping me if you want to know how it works out.
BTW – Barry, I think that the new logical layout of the blog’s header is spot-on.
April 22nd, 2009 at 8:05 am
Many “brilliant” economists predicted that the price of gold would plummet once we left the gold standard. They confidently argued that gold had a “monetary premium” which was keeping its price high.
April 22nd, 2009 at 8:21 am
When royalty sent out galleons to the Americas which came back with gold, they never realized it would not make them richer. It just created inflation.
April 22nd, 2009 at 8:23 am
It’s not because you have a currency backed by gold that you wont get inflation.
All you have to do is print more notes for the same amount of gold and voilà, more inflation.
April 22nd, 2009 at 8:32 am
little known fact…
If you hit a midget over the head with a wooden stick, he turns into 3 shiny gold coins.
as per Patton Oswalt
http://www.youtube.com/watch?v=tfan5MacmsI&feature=related
April 22nd, 2009 at 8:42 am
Wow Barry,
It must be disappointing to find out that so many of your readers have been so well trained in their government schooling.
The next few years may provide a real education.
April 22nd, 2009 at 9:13 am
Imagine a fixed gold supply, imagine that gold is the basis for currency valuation, and imagine an economy with a growing goods and services base. In other words, the economy grows while the quantity of gold is held constant.
What do you have?
Answer: You have no incentive to produce.
Since an increase in the supply of gold, holding uses for gold constant, is the definition of inflation … if you increase the uses for gold while holding the supply constant, you have the definition of deflation. Assuming deflation, there is no incentive to produce since the value of your gold will decline over time. You have no incentive to save since your savings will decline in value.
Unless you can expand the gold supply in a realistic relation to the growth of the real economy, you have a dead economy.
April 22nd, 2009 at 9:23 am
Strike my analysis above. I messed up. You have an incentive to save since the value of your savings will increase in a deflationary environment.
However, your incentive to produce is still diminished since, if you borrow money your repayment will be made with deflated dollars. For example, you borrow $100 at nominal value. You pay back $105, assuming 5% interest. Since cash is worth more than $105 relative to the date you borrowed, the actual value of your loan repayment will carry an implied interest rate that coincides with the growth rate of the real economy. Thus, borrowed money or invested capital is real expensive.
April 22nd, 2009 at 9:24 am
Little known gold investment formula:
The price of gold is inversely proportional to the number of times people use the word “fiat” in conversation.
April 22nd, 2009 at 9:27 am
I once read an evolutionary psychologist who speculated that part of the original attraction to gold and diamonds in particular is that they reflect light in some way that triggers an evolved response that we once used to find life-giving water–that is, searching for sparkles of sunlight reflected by water in the distance. I wish someone would do a spectrum analysis of prescious stones and metals to determine which ones reflect sunlight most similarly to fresh water in an oasis, pond, or Alpine stream.
April 22nd, 2009 at 9:27 am
1.) No counterparty risk
2.) Has risen in value every calendar year for the last eight years
3.) Saved my retirement next egg’s ass for the last couple of years of stock market turmoil (along with going short)
April 22nd, 2009 at 9:29 am
Finally, assume a large gold find that follows a long deflationary period where the amount of gold was constant but the real economy managed to grow. Your savings would be worth squat since the large new gold find created instant inflation.
A gold based economy is a loser game.
April 22nd, 2009 at 9:30 am
1.) Ben Bernanke is NOT an alchemist and can’t print gold out of thin air
2.) Gold is inflation adjusted
3.) But the NUMBER one reason is from this schizophrenic mess http://www.lewrockwell.com/north/north204.html (According to the book I.O.U.S.A. he autogrpahed that article a few years ago for Congressman Ron Paul and told Dr. Paul that he still believes in what he wrote. Oooookaaaay
April 22nd, 2009 at 9:32 am
Chemistry probably evolved from alchemy which itself came from the desire to transform matter into gold.
April 22nd, 2009 at 9:35 am
So for centuries we’ve been putting more effort and energy into getting easy money instead of simply focusing on creating GDP!!! lol
April 22nd, 2009 at 10:10 am
Governments can manipulate a gold standard as easily as they manipulate fiat currencies.
During periods of low inflation, gold is a bad investment.
Shorting gold futures spikes is fun.
April 22nd, 2009 at 10:33 am
1. Jean Marie Eveillard said the reason a value investor would invest in gold depends on the supposition that people will view gold as an alternative form of money.
2. American Gold Eagles are now being made with Australian gold.
3. I read in a very old book about gold that it has an allotrope form that is a blue powder, but I have never been able to find any confirmation of that.
April 22nd, 2009 at 10:46 am
9 out of 10 movie villains choose gold as their tool of extortion.
Can 9 out of 10 villains be wrong?
April 22nd, 2009 at 11:29 am
1) Gold keeps control with the people since government cannot spend if they dont have the gold, hence the bailouts would have been impossible unless there were people willing to lend the government the gold (ie money). Also the governments will be mindful that they must repay also in gold.
2) A Gold standard has been sold to the public as being too rigid and not providing enough flexibility, but in actuality it enforces discipline on all. Debts cannot rise beyond certain limits because one must have the gold (borrowed or otherwise). A lack of a gold standard benefits the creators of inflation (central banks and governments)
3) Giving South Africa/Canada too much control, has been touted as a reason not to return to the gold standard because they have large deposits of the metal. What people dont realize is that even if these countries have deposits, significant effort, energy, knowledge goes into extracting that metal. So if these countries can put in the effort to export gold, it would still be fair as they will be exchanging an equal amount of effort (in the form of food, energy, etc) from the buyer of their gold. Whereas today, money can be created out of thin air, so we all exchange our labor for pieces of paper which takes no effort to create.. this is hardly fair.
4) I have also heard statements like “people who own gold deposits like Russia, South Africa can collude to hold gold back from the market to control prices, like OPEC”. This is another misconception. Unlike base metals, oil, etc (which are commodites for consumption), gold is not consumed, it is stored. For the consumable commodities, annual production is a significant amount when compared to what is stored in warehouses. Hence holding back production would impact prices. For gold however, all the gold ever mined still exists and hence annual gold production is miniscule compared to what is out there. So if producers try to hold production back to raise prices, there will be a flood of gold from existing holders, thereby ensuring free market prices.
April 22nd, 2009 at 12:13 pm
By Dan Norici
http://www.JSMineset.com
Tuesday, April 21, 2009
http://www.jsmineset.com/
The vast majority of those who read this site [JSMineset.com] are fully aware of the shenanigans of the bullion banks over at the Comex and how they continue to bamboozle the hedge funds whose automaton-like response to momentum trading prevents them from beating this group at the paper game by standing for delivery in size. Additionally, their allegiance to system-trading and computer algorithms prevents them from thinking creatively and learning to take advantage of their enemies’ tactics against them. Good traders learn to adapt to changing market conditions and modify their strategies when confronted by successive losses — the hedge funds, however, when it comes to gold, do no such thing.
Keep in mind that the name of the game in gold, as far as the monetary authorities are concerned, is deception. By artificially suppressing the price of gold, for much the same reason as the Fed has been artificially attempting to suppress long term interest rates by a deliberate policy of quantitative easing, the money lords hope to cloud the signals that free market prices would generate to the investing public.
Remember when gold prices first spiked above $1,000 and all the coverage that was received on both the financial cable shows and the internet news sites? That is the last thing any Western Central Banker wants to see because it is in effect a condemnation of the policies and practices that they have embarked upon. So what to do? Simple, confuse the issue and distort the signal by working over the gold price to dampen down any potential excitement, not to mention attempting to kill a rival.
When one looks at the present price at the Comex as of today and the short term technical chart pattern, it is not particularly encouraging for the bulls so you could say that Central Bank efforts in conjunction with their favored insiders at the bullion banks have been somewhat effective of recent weeks. However, there is one thing that no amount of market intervention and price manipulation can succeed in doing and that is in changing the basic structure of the futures market as evidenced by the relationship of the front month contracts to the later dated contracts.
In trading terms, we refer to the “spread” between the front month and a back month/months or the difference in price between the two, as a gauge of demand for that particular commodity. As a general rule, when the front month trades at a discount to the next month or to a later-dated month, the structure of that particular commodity futures market is normal or in contango. A market in contango will see those distant month contracts trading at enough of a premium to the front month to account for any storage charges, insurance against loss and interest rates. Simply put, a seller has to be recompensed for his expense in storing a commodity while they wait to sell it into the market at some point in the future.
Whenever a market begins to see this “spread” between the front month and the next month or more distant months begin to tighten or narrow, then something is beginning to change regarding the demand/supply picture in that particular commodity. Why is this? Because the market is ratcheting up the front month price and attempting to send a signal to potential sellers that demand is increasing and that they are better served by selling sooner rather than later. Economically speaking, the incentive to store the commodity, pay all those storage costs, insurance costs, etc,. is not worth the increased cost that they might hope to receive at some point in the future. “Sell it to us now and we will pay you more for it than if you try to sell it later,” is the message the market is sending.
When markets begin moving in this direction, narrowing the spread, they are said to be moving towards a condition known as, “backwardation”. True backwardation occurs when the front month moves to a PREMIUM over the next month and particularly over the next set of three or four different contract months. (A note here: Generally a market will not go into backwardation more than a few distant contracts out because it is assumed that the increased demand will result in increased production at some point and induce producers of that particular commodity to increase production on out into the more distant future bringing the demand/supply picture into more of an equilibrium. That will serve to bring the market back into a more normal structure of contango.)
Backwardation is a powerful signal of very strong demand that is attempting to send a signal to the market that it needs more of that commodity to satisfy existing levels of demand. While market price manipulation can be somewhat effective short term for fogging signals generated from a rising price in gold for example, it is generally unable to affect the spread structure of the entire set of futures contracts listed on the board at any given time.
With this in mind, take a look at the April 2009 Comex gold contract and its spread between the June 2009 Comex gold contract. Notice the narrowing of the spread, or the move in the direction of backwardation. It is not there yet but the fact that this particular spread has narrowed so significantly is more than noteworthy. It is a mere $0.60 from moving into backwardation after having traded as wide as $6.50 at one point.
To show that it is not just an April/June phenomenon, but rather one that is beginning to characterize the structure market of the Comex gold contracts, please note that the EXACT same thing has been occurring in the April 09/Dec 09 Comex gold spread. It too has narrowed quite significantly.
While nothing is foolproof in this day and age of managed markets and official sector shenanigans, the timeless spread charts are telling us a story that even the best efforts (or worst efforts if you prefer) of the Western Central Bankers and their unending war on gold is drawing to a close in which their policies have all but ensured their defeat at the hands of the “barbarous relic.” In the short term they can win many battles but in the long term they cannot prevail in the war against gold.
For the April 2009 vs. June 2009 spread chart:
http://www.jsmineset.com/wp-content/uploads/2009/04/april-09-gc-versus-j...
For the April 2009 Comex gold vs. December 2009 gold spread chart:
http://www.jsmineset.com/wp-content/uploads/2009/04/april-09-comex-gold-...
April 22nd, 2009 at 12:38 pm
Well, for starters, a gold braze was used to manufacture the Space Shuttle’s liquid-fueled engines. That same gold braze was/is used to help drill for oil and natural gas. There was some suspicion that that Hughes platform ship the Glomar Explorer was going to be used for gold exploration and processing in the open sea. Of course, it was just hunting for a sunken Soviet submarine. Hey, I just thought of another gold connection, while speaking of submarines. I understand that the Soviets built an all-titanium hulled attack submarine (I believe its NATO code was ALFA class) but it cost so much to build that the Soviets themselves called it the “golden fish” because it would have been cheaper to build it out of pure gold.
April 22nd, 2009 at 12:57 pm
Giving South Africa/Canada too much control
That’s absurd. That’s never an issue regarding the hockey player surplus
April 22nd, 2009 at 1:12 pm
In gold vs. fiat currency debates I would argue gold to be the more favorable in every argument taken:
1) Gold cannot be counterfeited or printed.
2) Gold supply is held relatively constant. Please look into Barrick Gold’s most recent 40F. They claim future mining reserves and resources will be decreasing in future years.
4) Gold can be melted into coins and easily distributed.
Others have made plenty of other arguments I won’t reiterate. Where the most confusion is arising is inherent in the system. So long as our financial institutions are able to loan out 90% or more of their reserves in loans with a Federal Reserve backstop to bail them out at taxpayer expense, the fiat currency vs. gold currency debate is for naught.
Therefore so long as the system is flawed, a gold “standard” will prove unreliable as well just as it did in the early 1900′s. Gold will work as an excellent currency when banks are held to 100% reserve requirements and where the people, not governments are given the right to ownership. Government’s role should only be in enforcing penalties against fraud. Of course paper currency in theory could work the same way, but the ease of which more money could be created into existence, even without Federal Reserve control is much greater than that of gold, and hence gold’s honesty.
Thee argument made above that gold is deflationary as populations grow is not entirely correct. The purchasing power of gold in relation to resources and other commodities would rise, a good thing. Keep in mind prices of commodities and resources are not ruled by the purchasing power of a currency alone and supply and demand for those goods also have substantial influences. The stability of the gold in relative purchasing power would allow entrepreneurs to adjust their forecasts.
Please refer to the end of this article to see how this might look: http://mises.org/story/3386
See the section titles “ways of returning to sound money”
April 22nd, 2009 at 1:23 pm
“dead hobo Says:
April 22nd, 2009 at 9:29 am
Finally, assume a large gold find that follows a long deflationary period where the amount of gold was constant but the real economy managed to grow. Your savings would be worth squat since the large new gold find created instant inflation.
A gold based economy is a loser game.”
Dead Hobo, are you trying to be funny? Your argument makes little practical sense. Yes, it is *possible* that a giant gold find might occur, but a gold find that would be a significant fraction of all of the mined gold in history is very unlikely. Moreover, mining takes work, so it would not come without cost.
In contrast, every fiat currency regime in history has suffered from failure due to massive injection of new money.
Do you seriously believe, in light of what we have seen just in the last few weeks, that a politically selected group of bankers–a group which benefits from constant inflation of money and credit–will work on your behalf to keep money and credit at stable levels compared to the supply of physical gold?
It is time to get off of “dollars” and switch over to tenths of grams of gold as our monetary unit. (This is the standard unit that is closest to the price levels in dollars.) We also need sound banking regulations with criminal penalties for operating unsound banks.
April 22nd, 2009 at 1:27 pm
Am curious, alot of analysts are predicting a run on the dollar in the event of either US govt default or massive scaled up printing. Either scenario seems very likely, therefore a run on the dollar seems inevitable. To counter this, if the US Govt re-established a linkage to gold in some manner, would that boost the public’s confidence (foreign and domestic) in the dollar and stem or prevent a dollar crash?
April 22nd, 2009 at 1:38 pm
During this gold bull market, the largest source of demand has been gold miners covering their hedges. Now gold miners are the least hedged they’ve been in quite some time. Don’t think many people understand that important fact.
April 22nd, 2009 at 1:57 pm
Gold hasn’t hit it’s potential as a store of value or wealth in every man’s asset allocation strategy. Here’s a quick look at gold’s 2009 price potential in US dollars as forecast by some very conservative analysts:
http://www.lbma.org.uk/pubs/forecasts
April 22nd, 2009 at 2:11 pm
1. gold did not organically grow into use as money by people, but was dictated by the king to be a coin of the realm and provide the functionality for the poor to pay taxes but not be able to create money at will
2. silver bars can still be had over the counter at banks in switzerland
3. since the creation of federal reserve and diminishing role of gold (1913) and abandonment of gold (1971) we have not had smoother boom bust cycles – as one would expect through technology and accumulated knowledge. what we have had are less financial events, however they have reached much greater extremes.
April 22nd, 2009 at 2:19 pm
China never adopted the gold standard and always used Silver coins for currency until the late 1930s when it was still common to see old Mexican silver dollars in circulation. China stuck to silver in 1898 while the USA and Japan switched to gold, a decision some feel was responsible for the rapid disintegration of the Chinese economy in the last 15 years of Qing Dynasty rule.
Today China is the world’s biggest producer of gold. An unknown amount of new gold mined in China may be diverted to Beijing’s monetary reserves.
April 22nd, 2009 at 2:37 pm
This is a fun discussion… I’m no expert, but I’ll lay out what I believe to be true:
1. The value of gold is based on the assumption that others will want to hold it later… and those others will demand in the belief that others will want to hold it later. In other words, it’s value is dependent on confidence, as is fiat currency’s value.
2. A gold standard makes it difficult for a government to devalue its currency (although it can always get off the gold standard, or lower the amount of gold its unit of currency is worth).
3. The fractional reserve banking system does seem to be a source of price instability. In good times when lending is plentiful, the Fed can set interest rates too low, expand the money supply too much, and cause inflation or blow asset bubbles. When credit bubbles burst and lending deteriorates, the money multiplier decreases shrinking the total money supply, causing deflation.
My question is this:
Would a gold standard eliminate fractional reserve banking necessarily? It wouldn’t make sense to me to allow private banks to increase the money supply without the gold to back it up in a gold standard, but I guess I don’t know how it used to work under the gold standard.
April 22nd, 2009 at 2:43 pm
1) There is estimated to be millions of tons of gold dissolved in the ocean, enough to pay off the national debt and then some. Good luck getting it out at around 13 parts per trillion. Uranium, for example, is found at much higher concentrations (about three orders of magnitude).
2) Gold is used for heat shielding in large thin sheets across the deck lids for badass LeMans cars because it has good heat rejection properties, which keeps the deck lid from catching on fire from the engine heat. Yes, when they pull off that engine cover, that big sheet of shiny stuff is pure gold. But the carbon fiber deck lid cost a lot more to make than the gold is worth.
3) A large percentage of people who send in gold to “Cash for Gold” are sending in stolen gold to support their meth habit… OK, I made that one up, but does anyone really want to argue that that’s not probably true?
April 22nd, 2009 at 2:49 pm
1. Gold is portable wealth, can cross most borders.
2. There is no tax in physical gold. Only if you sell too much at one time. Anything other than Gold, can be taxed to the brink.
3. The real value of Gold along with Guns/Ammunition, Bicycles and Food is during Chaos, Anarchy and collapse of society.
Very hard for Americans to understand how powerless one feels during severe downturns and government collapse. Think Thailand, Pakistan and Eastern Europe, coming soon. (Not intended as a put down. Just a fact.)
TRUE STORY
While I was traveling in the Sinai dessert, I stopped at a town to buy gold jewelry. A Bedouin family traveling with Camels was buying 22K gold wire. (Semi-circle profile 1.4″ wide.) At the end of the bargaining, the store owner cut the wire into several 6-7 inches long pieces and crudely created bracelets. The Bedouin wife dressed in long black garb lifted her long sleeves and slipped the bracelets into her arms. To my amazement it looked like she had bracelets going al the up to her underarms.
The owner explained to me later that they were traveling between Egypt, Israel, Gaza, Jordan and other countries. No trust in paper money and counterfeit bills. Any time they make money on trading, they buy more gold wire, anytime they need money, they go to the gold market of whatever country they are in and sell bracelets. No one dares touch a Muslim woman or request to take the garb off.
Please draw contemporary parallels in the Western World.
April 22nd, 2009 at 3:11 pm
1.) Sweatin’ to the Goldies!
Sweating is a procedure in which coins are placed in a bag and shaken vigorously to knock off small pieces of metal. The bits of metal are gathered and sold as scrap, leaving the original coins to be returned to circulation at face value. A practice mainly employed with gold coins, leaving their surfaces peppered with tiny nicks.
(another form is to drill a hole in the coin, sometimes even plugging the hole with some less-valuable alloy.)
2.) Under current law, the gold in Fort Knox (or any other vault) would not be used to mint gold coins.
Gold used for coinage must come from newly mined sources … U.S. sources. (contrary to what ellidc says in a post earlier)
[CITE: 31USC5112]
(7) Source of gold bullion.–
(A) In general.–The Secretary shall acquire gold for the coins issued under this subsection by purchase of gold mined from natural deposits in the United States, or in a territory or possession of the United States, within 1 year after the month in which the ore from which it is derived was mined.
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=browse_usc&docid=Cite:+31USC5112__
3.) Most gold mines also mine other ores, such as silver, zinc and copper.
“…about 75% of the supply of newly minted silver originates as a by-product of mining other metals.”
- RichDad’s Advisors Guide to Investing in Gold and Silver
********************
Here’s a little more insight into the mining process:
http://www.marthamine.co.nz/ore_process.html
http://www.marketoracle.co.uk/Article8307.html
April 22nd, 2009 at 3:37 pm
not sure why so many think gold is money, try buying some thing with in another country and see how far its gets you. gold has value only if some one else values it too. not many do any more. and while those who think it would make things more stable consider these. its consider that one of the primary causes for the great depression (the one in 1929) was the urge to get back on the gold standard which lead to a crises in Britain, and made the US rich only because we became the low cost producer, some thing we are no considered today . and considering the history we had before we left the gold standard, it could not be argued that it made those times more stable. we had crises (like today and 1929) almost every 10-15 years. just like clock work. and i doubt that gold can’t be destroyed. its not that tough a material. the toughest material is diamond. but i am not seeing to many wanting to use that as money (but i would suspect it has been). and while you might could say that governments can’t print money while on it, the impact of changing the amount of gold per dollar (or what ever currency) would have the same impact wouldn’t it? and there is also the problem the impact to the economy of trying to get back. given today’s global trade, the amount of gold the US has would be minuscule. never mind the reduction in amount of economic activity. we would need to reduce that by at least 90%. the only advantage is it might be a simpler world. maybe
April 22nd, 2009 at 3:38 pm
Oracle, thanks for that story.. proves my earlier point about americans in general not understanding gold.. gold also helped jewish people escape nazi germany.. again, the border thing..
April 22nd, 2009 at 4:06 pm
1) Gold’s primary trait is that it has no counter party risk. Derivatives have counter parties. Loans have a counter party. Even FRNs are a liability of the Federal Reserve (assets backing are treasury bonds, MBS, etc.)
As such gold is the only thing in the world that can extinguish debt (an obligation). Debt can’t be extinguished with another obligation.
2) Gold was chosen for specific properties. Some of them (portability, divisibility), are obsolete in the modern world. Some will always be useful (scarcity). Gold competes with other currencies (like the dollar) and its value is based on supply and demand (the value of money is based on supply and demand just like everything else).
3) Gold can rise versus the dollar in inflation or deflation. In inflation nearly everything is rising versus the dollar, and gold competes versus those alternatives (stocks, land, oil, etc.). In deflation the demand for money is high, and as a form of money gold competes versus the dollar. In today’s world gold can’t settle dollar denominated debts, but it still maintains the advantage of #1. Also, the interest rate differential between gold and the dollar goes away at ZIRP.
Since gold is not a productive asset and it does not pay interest the worst time for gold is periods of economic and price stability where income producing assets perform best.
4) A gold standard is not a banking system. One can have gold convertibility while having all sorts of other things to increase the money supply (like fractional reserve banking). Also there are differing levels of convertibility (during Breton Woods American’s could not own gold).
April 22nd, 2009 at 4:11 pm
The US government one day a not so very long time ago said that you had to trade in your gold to the Gov or else.
http://en.wikipedia.org/wiki/Executive_Order_6102
April 22nd, 2009 at 4:17 pm
The US government one day a not so very long time ago said that you had to trade in your gold to the Gov or else
—————-
And it will probably do so again if it needs to.
April 22nd, 2009 at 4:36 pm
1. The Fed hasn’t figured out how to print gold although the commodity futures exchanges have with Warehouse Depository Receipts (http://www.noonehastodietomorrow.com/agenda/economy/975).
2. Platinum is 30x rarer than Gold, yet only trades at a 30% premium to gold.
3. Paladium is 15x rarer than Gold, yet trades at a 70% discount to gold.
April 22nd, 2009 at 4:36 pm
Check out photo #5 here: http://www.boston.com/bigpicture/2009/04/earth_day_2009.html
Local miner Cesar Abac uses a wooden bowl and mercury to pan for gold near at the village of Las Cristinas, southern Bolivar State, Venezuela on January 30, 2009. Four centuries after the lure of Venezuelan gold brought ruin to English explorer Sir Walter Raleigh, the riches at one giant mine some say is cursed still haunt treasure hunters from across the globe. But the Las Cristinas saga, involving a ghost town, environmental devastation and fist-sized nuggets, underlines the risks of business in Venezuela, where the draw of natural wealth has been dulled by rule changes and economic turmoil.
April 22nd, 2009 at 7:17 pm
Barry
I have never understood the gold fetish many people have.
You note that over the entire course of human history, only enough gold has been mined to fill two olympic size swimming pools.
Okay. But so what?
If I told you that throughout recorded human history only enough fly shit has been produced to fill ONE olympic size swimming pool, would you pay me twice the price of gold for my collection of fly shit?
I don’t understand why gold has any more “intrinsic” value than, say, sea shells. They can also be pretty and shiny.
As far as I can tell, gold has value, other than as an industrial commodity, only because some people invest it with mystical significance (like diamonds) on account of its scarcity.
But lots of things are scarce — and worth little or nothing.
How much am I offered for my collection of fly shit?
April 22nd, 2009 at 9:03 pm
Gold by its physical nature is intrinsically more valuable than diamond.
ex: One shot with a hammer to a diamond and you have instantly destroyed much of its current value.
April 22nd, 2009 at 10:15 pm
If you can lift your safety deposit box, you don’t have enough gold.
April 22nd, 2009 at 10:22 pm
I agree that a lot of people here know jack shit about gold. You know lots about lots but if want to know about gold then theres only one guy who knows the most – Jim Sinclair. Anyone who talks about gold publicly without understanding at least a little reality from the guy who knows the most is a nincompoop. If you ask him a question he’ll tell you the truth. Thats all I know about gold.
April 22nd, 2009 at 10:33 pm
“One shot with a hammer to a diamond and you have instantly destroyed much of its current value.”
Yes, but one shot with a hammer to a dollar bill and voila!…..not a scratch upon it!
April 23rd, 2009 at 4:46 am
It may make you an enemy of the state…
http://www.garynorth.com/public/4857.cfm
April 23rd, 2009 at 11:40 am
Here is an interesting article “As good as gold” by Dr Ahamed Kameel Mydin Meera, who is an Associate Professor in the Faculty of Economics and Management Sciences, International Islamic University Malaysia.
He is an advocate of Islamic Gold Dinar (i.e using gold as the medium of exchange, at least in the Organization of Islamic Countries). His book on Gold Dinar can be found on http://www.ahamed-kameel.com/books/
April 23rd, 2009 at 12:34 pm
It can be used to treat arthritis.